ECB cuts rates but says governments must save euro
Mario Draghi
(FRANKFURT) - The European Central Bank cut Thursday its key rates and boosted measures to help banks, but insisted the debt crisis is for governments to solve as EU leaders gathered for a make-or-break summit.
The ECB's governing council, under intense pressure to come to the euro's rescue, lowered eurozone borrowing costs for the second time in two months, cutting the rate for its main refinancing operations by a quarter of a percentage point to 1.00 percent.
The ECB also said it would extend the term of its liquidity-providing operations to three years, ease the requirements for the collateral put up in return for the loans, and cut the mandatory reserves eurozone banks must hold at the central bank by half to 1.0 percent.
That will provide reassurance that the ECB will support the region's banks in the long haul, as previously funds were available only for up to one year.
The ECB has played fire-fighter throughout the two-year long sovereign debt crisis and its president, Mario Draghi of Italy, told a news conference that the bank would continue to play its part.
But ultimately it was up to governments to "do their utmost" to restore shattered confidence in the single currency, he said.
"The ultimate decisions are in the hands of leaders," Draghi said.
Looking ahead to the summit in Brussels, Draghi said "what's happening is a redesign of the fiscal agreement in a way that would rebuild confidence.
"We have our own views, but the ultimate decisions are in the hands of leaders. They bear responsibility for the decision," he said.
Nevertheless, the Italian, who took over the reins of the ECB in November, appeared distinctively cool towards larger scale central bank action.
Among some of the proposals recently put forward are for central banks to lend funds to the International Monetary Fund, which could then be used as a safety net for eurozone sovereign debt.
But Draghi told reporters such action would raise "complex legal issues" and he was adamant that the ECB must not be used simply to print money to buy up the mountain of debt that many eurozone countries have amassed.
That went against the very rules that the eurozone and the wider EU was built on, he argued.
Draghi also stated that the ECB had not discussed capping bond yields or bond spreads.
The bank chief expressed surprise at how some of his recent comments had been interpreted in such a way as to suggest the bank was considering ways of scaling up its anti-crisis role.
He stressed once more that the programme of buying up the sovereign bonds of debt-wracked countries was "limited" and "temporary".
Markets appeared disappointed by the ECB's refusal to take more decisive action and both stock markets and the euro fell.
"The European Central Bank is offering maximum support for banks. But it is refusing to address the root cause of the euro crisis, the collapse in global confidence in the ability of the eurozone to save itself," said Berenberg Bank chief economist Holger Schmieding.
"That does not bode well for the further eurozone decisions coming up in the next few days."
While the support for banks went far, "such support is a mere tinkering with the symptoms," Schmieding said.
"No amount of liquidity injections into the banking system can reliably stabilise the situation as long as global markets believe that bank holdings of Italian and Spanish sovereign debt are toxic for lack of a reliable safety net in case of a market panic."
Jonathan Loynes, chief European economist at Capital Economics, said the ECB had "shattered hopes that it is about to fire a silver bullet into the heart of the debt crisis."
For a start, Draghi had revealed that the rate-cut the decision was not unanimous. And he gave little indication that the central bank might be prepared to cut rates further, the analyst said.
Overall, "with the ECB refusing to come to the rescue, it is very difficult to see just what is going to bring the current crisis to an end," Loynes said.
Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast, also believed the ECB's measures "are not enough."
"The ECB is clearly putting the onus on governments to implement a fiscal compact," she said.
"Stricter fiscal rules could potentially enhance stability in the medium-term. However, we hoped that the ECB would take the opportunity of a clear announcement on a fiscal compact to step up its intervention in bond markets," she added.